A plan for poverty

Dr David Law
Insights newsletter
3 July, 2020

The Green Party’s “Poverty Action Plan” is all about tackling poverty, although the outcomes may differ from what the party expects.

While it is meant to help struggling New Zealanders, the plan will instead disincentivise work, saving, investment in education and skills, capital, enterprise and innovation. 

Projected net government debt is already expected to balloon out to 54% of GDP by 2024, remaining high for decades. Never mind this, say the Greens. The party’s poverty plan will march ahead with permanent welfare spending increases and introduce a ‘guaranteed minimum income’ of at least $325 a week – along with further boosts to the minimum wage.

The proposal will cost the taxpayer an additional $6.6 billion in the scheme’s first year, jumping to $12.6 billion in 2023. (For reference, the entire New Zealand Superannuation bill topped out at $14.5 billion in 2019 and all other government transfers and subsidies to households combined totaled $13.5 billion).

To pay for its poverty plan the Green Party would introduce a wealth tax, raising $7.9 billion in its first year alone, with a 1% tax on net assets over $1 million and a 2% tax on net assets over $2 million. The party would also increase income tax, with higher tax rates on all income over $100,000 topping out at 42%.

It’s worth keeping in mind that unemployment could peak at 10% during this recession so creating new jobs, helping people transition to those jobs and ensuring their skills are up to par will be critical for a recovery.

Instead, the Greens’ plan to increase benefits will reduce incentives for low-skilled workers to return to work, while an irresponsibly timed and short-sighted minimum wage increase implemented during lockdown, together with further increases, will ensure fewer jobs are created.

It’s also well recognised that high relative minimum wage rates (New Zealand’s is already amongst the highest in the OECD) disproportionately hurt the job prospects of the young and vulnerable. Multiple rates can alleviate this risk. Instead the Greens’ poverty plan will scrap the starting out rate. 

In addition, higher relative minimum wage and income taxes reduce the value of additional education. A less educated and skilled workforce would help secure our status as a low-wage economy for decades to come.

Kiwis will have less capital to work with as wealth taxes discourage saving and result in capital flight. They’re also costly to administer and generate little revenue. A lot of countries have already abolished annual wealth taxes and the recent Tax Working Group recommended against them for precisely these reasons.

Supposedly the wealth tax would raise 2.5% of GDP in its first year, making it one of the most stringent in the world. European countries with similar taxes raise only about one tenth of that.

The Greens propose what few countries would dare to do in a recession, but incentives still matter – even during recessions. For this reason, expect the poverty plan to deliver a dose of poverty to all.

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